Yen Surge Triggers Nikkei Plunge as New LDP Leader Ishiba Signals Policy Shift

The Nikkei stock index in Japan plunged nearly 5% on Monday, marking its third-biggest point loss of the year, as exporters were sold off due to the stronger yen following Shigeru Ishiba's victory in the ruling Liberal Democratic Party's leadership race. Ishiba, set to become Japan's next prime minister, has expressed support for the Bank of Japan's efforts to normalize monetary policy and may consider raising the capital gains tax, a move that could impact the country's financial markets.

Yen Strength Rattles Japanese Equities After Surprise LDP Leadership Change

Nikkei Tumbles as Yen Surges on Ishiba's Victory

The 225-issue Nikkei Stock Average ended the trading session down 1,910.01 points, or 4.80%, from Friday, closing at 37,919.55. The broader Topix index also finished 95.00 points, or 3.47%, lower at 2,645.94. The sell-off was led by transportation equipment, real estate, and securities house issues, as the stronger yen weighed on the prospects of higher profits for export-oriented companies. The U.S. dollar briefly slid to the upper 141 range against the Japanese currency, which is viewed as a safe-haven asset, as investors anticipated Ishiba's support for the Bank of Japan's efforts to normalize monetary policy.

Investors Reassess Expectations After Ishiba's Surprise Win

The market's decline was seen as a reversal of the recent gains driven by expectations of a win by Sanae Takaichi, a proponent of monetary easing, in the LDP leadership race. Analysts noted that the sell-off erased these recent gains, as investors had gone too far in their expectations of a Takaichi victory and its implications for the yen and the BOJ's policies. The uncertainty surrounding Ishiba's economic policies also weighed on the market, as investors sought clarity on his plans for the economy.

Banks Benefit from Prospect of Higher Interest Rates

The only sector to rise in Tokyo on Monday was the banking sector, as the prospects of future rate hikes raised expectations of higher borrowing costs and improved profits for financial institutions. The yield on the benchmark 10-year Japanese government bond also ended the day at 0.850%, up 0.045 percentage points from Friday's close, as the debt was sold off on the view that Ishiba is unlikely to oppose gradual BOJ rate hikes.

Ishiba's Ascent Signals Potential Policy Shift for Japan

Shigeru Ishiba's victory in the LDP leadership race has significant implications for Japan's economic and financial landscape. As the new prime minister-in-waiting, Ishiba's support for the BOJ's efforts to normalize monetary policy and his potential consideration of raising the capital gains tax could have far-reaching consequences for the country's markets and businesses. The market's reaction on Monday underscores the uncertainty and volatility that can arise from such a leadership change, as investors grapple with the potential policy shifts under Ishiba's administration.